Antifraud Provisions (USA Section 101)
The antifraud provision is the single most important rule in the Uniform Securities Act. It forms the legal foundation for nearly every fraud-related violation you'll study in this unit.
The Universal Antifraud Rule
USA Section 101 makes it unlawful for any person, in connection with the offer, sale, or purchase of any security, directly or indirectly, to:
- Employ any device, scheme, or artifice to defraud
- Make any untrue statement of a material fact or omit a material fact necessary to make statements not misleading (in light of the circumstances under which they are made)
- Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person
Section 101 is modeled on SEC Rule 10b-5 under the Securities Exchange Act of 1934, which uses nearly identical language.
Scope: Who and What Is Covered
Section 101 has the broadest possible reach in the USA:
- Applies to offers, sales, and purchases; it protects both buyers and sellers
- Covers every person: registered or unregistered, broker-dealer or issuer, individual or entity
- No registration is required for Section 101 to apply; even an unregistered person acting unlawfully is subject to the antifraud provision
Exam Tip: Gotchas
Section 101 has no exemptions. The exam frequently tests whether an exemption from registration also exempts a person from fraud liability. It does not. Even an agent selling an exempt government bond or completing an exempt transaction (like a private placement) is fully subject to the antifraud provision.
The Three Prongs
Understanding the three prongs helps you spot violations on the exam:
| Prong | What It Covers | Intent Required? |
|---|---|---|
| (1) Device, scheme, or artifice to defraud | Deliberate fraud schemes | Yes (intentional) |
| (2) Untrue statement or material omission | Misrepresentations and half-truths | Depends on context |
| (3) Act or course of business operating as fraud | Conduct that has a fraudulent effect | No (covers conduct that "operates" as fraud even without specific intent) |
Key distinction: Prong (3) does not require the Administrator to prove intent to defraud. If conduct operates as fraud (meaning it has the effect of defrauding someone), it violates Section 101 regardless of whether the person intended to cause harm.
Sanctions for Violations
Violations of Section 101 can trigger multiple types of enforcement:
- Administrative proceedings (Sections 204 and 306): Denial, suspension, or revocation of registration
- Judicial injunction (Section 408): Court order to stop the fraudulent activity
- Criminal prosecution (Section 409): Up to $5,000 fine, 3 years imprisonment, or both for willful violations
- Civil liability (Section 410): Financial damages to harmed investors
Exam Tip: Gotchas
Criminal penalties require willful violations, but administrative and civil actions do not always require proof of intent. The Administrator can take action based on conduct that operates as fraud under prong (3), even if the person did not deliberately set out to defraud anyone.